FSA regime to increase confidence in credit unions

FSA Chairman Howard Davies said:

"We aim to develop a practical and proportionate regulatory system for credit unions which should meet the needs of the credit union movement and its members. We are confident that these proposals will improve consumer confidence in the financial soundness of credit unions, and that this will help to provide the positive environment credit unions need in order to grow and to pursue their social objectives.

The new regime is due to come into effect in mid 2002. This will allow time for full consultation and will give credit unions time to prepare for the new requirements. A separate consultation paper on credit unions' participation in the Financial Services Compensation Scheme and on their participation in the Financial Ombudsman Service will be published in the Spring 2001.

The main features of the proposed regulatory regime are:

Registration, authorisation and permission

In addition to the existing requirement for registration, credit unions will in future need to be authorised by the FSA in order to carry on business. They will become authorised by obtaining a deposit taking permission from the FSA.

Approved persons

The FSA considers that all credit unions should be required to comply in full with the FSAs Approved Persons regime. This should present no difficulties for new credit unions and for larger credit unions. However, recognising the possibility that existing smaller credit unions may be in a different situation, the FSA is also consulting on alternative approaches for these credit unions.

Systems and controls

Credit unions will be required to comply with the rules on systems and controls contained in the FSAs general Handbook. These will require a credit union to have in place systems and controls that are appropriate and effective in its particular circumstances.

Lending

Credit unions will continue to be subject to restrictions as to the amounts which they can lend and the periods of such loans. The FSAs rules will however introduce increased flexibility for credit unions on these matters.

Capital and liquidity

The FSA proposes new requirements for credit unions on capital and liquidity. These requirements are designed to be sufficiently flexible and proportionate to give appropriate protection to members savings without imposing an undue burden on the credit union. There will be different requirements depending on a credit unions size and activities.

Fees

The FSAs overall approach to fee-raising has still to be finalised but it is expected that credit unions, in line with other FSA-authorised firms, will pay an annual fee related to the size of its business. Banks and building societies have indicated that they may be willing to subsidise the regulatory fees of smaller credit unions: discussions on the details continue.

Roadshows and workshops

The FSA will be running roadshows and workshops early in the New Year to explain the proposals set out in the Consultation Paper and to help credit unions prepare for implementation.

Notes for editors

1. Credit unions are mutually owned financial co-operatives established under the Credit Unions Act 1979. The objects of a credit union are stated in the 1979 Act to be:

   (a) the promotion of thrift among members

   (b) the creation of sources of credit for members at a fair and reasonable rate of interest

   (c) the use and control of members savings for their mutual benefit

   (d) the training and education of members in the wise use of money and in the management of their financial affairs.

2. There are 686 credit unions registered in Great Britain with a membership of 293,000 and assets of 180 million.

3. Credit unions are currently registered by the Registry of Friendly Societies and are supervised by FSA staff under contract to the Chief Registrar of Friendly Societies. They pay fees for registration but their supervision is currently free of charge. The Treasury announced on 16 November 1999 that credit unions would come within the scope of FSA regulation under the Financial Services and Markets Act.

4. Consultation Paper 77 The Regulation of Credit Unions is available on the FSA Website under Publications.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.